(1)You are preparing a budget for the month of January and are trying to estimate maintenance cost for the month. The maintenance cost is an overhead cost that is categorized as being mixed – that is it has both a fixed and a variable component. To arrive at the budgeted figure for January you will use the HI-Lo method to first estimate the variable component of maintenance cost per hour of operation, and then the fixed monthly maintenance cost. You can then use these values to arrive at maintenance cost for the month once you know the level of operation (in hours) for January. Using the HI-LO method and the data given below for the prior five months what is your estimated of the fixed monthly maintenance cost

Question

(1)You are preparing a budget for the month of January and are trying to estimate maintenance cost for the month. The maintenance cost is an overhead cost that is categorized as being mixed – that is it has both a fixed and a variable component. To arrive at the budgeted figure for January you will use the HI-Lo method to first estimate the variable component of maintenance cost per hour of operation, and then the fixed monthly maintenance cost. You can then use these values to arrive at maintenance cost for the month once you know the level of operation (in hours) for January. Using the HI-LO method and the data given below for the prior five months what is your estimated of the fixed monthly maintenance cost

Hours of operations Monthly maintenance cost
7100 2,800,000
3100 1,400,000
5000 1,900,000
6000 2,100,000
3500 1,600,000
What is the fixed monthly maintenance cost _____________

Answer 1

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Answer 2

To estimate the fixed monthly maintenance cost using the HI-LO method, you need to first identify the highest and lowest levels of operation (in hours) and their corresponding monthly maintenance costs.

From the given data, the highest level of operation is 7100 hours with a monthly maintenance cost of 2,800,000, and the lowest level of operation is 3100 hours with a monthly maintenance cost of 1,400,000.

Next, you can calculate the variable component of the maintenance cost per hour of operation using the formula:

Variable Cost Per Hour = (Highest Cost - Lowest Cost) / (Highest Hours - Lowest Hours)

Using the given data:

Variable Cost Per Hour = (2,800,000 - 1,400,000) / (7100 - 3100)
= 1,400,000 / 4000
= 350

Now that you have calculated the variable component per hour, you can use it along with any level of operation (in hours) to calculate the fixed monthly maintenance cost.

Let's assume the level of operation for January is 5000 hours:

Fixed Monthly Maintenance Cost = Total Monthly Maintenance Cost - (Variable Cost Per Hour * Hours of Operation)

Fixed Monthly Maintenance Cost = 1,900,000 - (350 * 5000)
= 1,900,000 - 1,750,000
= 150,000

Therefore, the estimated fixed monthly maintenance cost for January is 150,000.